Accounting standards undermining UK pension schemes

The report - commissioned by the National Association of Pension Funds and written by the Leeds University Business School - said current accounting standards introduce short-term volatility into the measurement of companies' pension surpluses and deficits because they value assets based on market prices.

It said this short-term mark-to-market measure is at odds with the long-term nature of pension schemes, whose position in economic terms changes only gradually over time.

NAPF chairman Lindsay Tomlinson (pictured) said: "The current standards are not appropriate for the long-term nature of pensions. They allow short-term stock market volatility to perversely affect pensions and their long-term strategy by presenting large deficits which may prove inaccurate in the long-run."

The Accounting for Pensions report said companies had closed perfectly viable pension schemes and adopted extremely cautious investment policies as a result.

This has led to an increase in the cost of pension provision and a misallocation of investment in the economy through excessive investment in low return government bonds, it added.

The NAPF also said by choosing to invest into low return assets such as bonds rather than equities, pension schemes likely to opt for inferior investment strategy, but will also support the economy less at a time when it is risking a double dip recession.

"For too long accounting standard setters have focused on the theory rather than practice and there has been a vacuum of accountability. Accounting standard setters, both in the UK and internationally, need to have a real world approach that truly takes into account the economic consequences of their actions."

The report recommended pension liabilities should be valued as the discounted present value of future net asset/liability cash flows, thereby allowing for the asset/liability interaction that occurs over the life of a pension scheme.

It also said:

>> Pension disclosures should include the actual cash contributions that a corporate sponsor is committed to as a result of negotiation with scheme trustees and/or The Pensions Regulator.

>> The recognition of a discounted cash flow model of pension accounting through the accounts of the firm can be viewed as the long-term position of the scheme. To make this number useful, company accounts should also disclose the market value of scheme assets relative to a discounted pension liability.

The NAPF has long called for a change in accounting standards and early last year launched a review to find a better method of valuing pensions on company balance sheets.